Restoring Fiscal Order in the United States

The United States’ federal budget deficit is currently projected to explode, increasing the federal debt to unprecedentedly high levels. A very gradual fiscal consolidation, with federal spending as a share of GDP declining slightly each year, would both raise economic growth and create a more resilient economy.

STANFORD – In recent years, the US government has taken several essential economic-policy steps. The tax reform embedded in the 2017 Tax Cuts and Jobs Act (TCJA), the recent United States -Mexico-Canada (USMCA) trade agreement, “phase one” of a China-US trade deal, and recent regulatory reforms are all needed to revive and strengthen economic growth. It is now time for another essential policy step: correcting the trajectory of fiscal policy.

The Congressional Budget Office’s (CBO) current baseline projection of federal government spending in future years far outpaces federal government revenue, as the figure below clearly shows. The result is an exploding federal budget deficit, which will bring the federal debt as a share of GDP to 144% by 2049, according to the CBO baseline, and likely to the 219% projected in the CBO’s alternative fiscal scenario. These debt levels are unprecedented in US history.

In contrast to previous periods when the deficit fell after similar upward bursts, the current CBO projections show no such reversal. The large deficit will crowd out important federal programs, including needed infrastructure investment, as well as private investment needed for economic growth. Debt service will account for a rising share of spending, and the high debt will likely increase interest rates by more than the CBO assumes, leading to an economically perilous debt spiral.

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John B. Taylor, Under Secretary of the US Treasury from 2001 to 2005, is Professor of Economics at Stanford University and Senior Fellow at the Hoover Institution. He is the author of Global Financial Warriorsand (with George P. Shultz) Choose Economic Freedom.

Taylor's objective (lower deficits do free up resources for investment and faster growth) is valid and important, but I wonder why he thinks spending should adjust rather than taxes? Furthermore, shouldn't measures -- greater immigration, lower restrictions on international trade and investment -- to promote growth (the denominator of his fraction) be part of the picture? And although taxes on net CO2 emissions should be deficit neutral, you'd think they'd get a mention.

*The projected rise in spending is mainly driven by SS/Medicare but that's demographics. Their contribution to the deficit is an artifact of the mistake we made in the '30's to finance them with a tax wages rather than on consumption.

Quite agree. Moreover, the decision as to what proportion of GDP should be allocated to public spending is a POLITICAL decision: it is not one that economists should comment on, unless there are VERY BIG economic consequences deriving from a change to that proportion. And it would seem to judge from the experience of several European countries that a significant rise in the proportion of GDP allocated to public spending DOES NOT HAVE major economic implications: Europeans in those countries enjoy much the same living standards as in the US.

To say Taylor is less than totally clued up would be putting it too politely.

The reforms suggested in this article are what will happen, NOW that the benefits of hegemony and developed-world-led globalization are coming to an end. I say this with the addendum that my other comments, posted below, are taken into account.

Neoliberal policies were the pragmatic path to follow while hegemony and developed-world-led globalization were in play.

And a shift towards progressive policies is the pragmatic path to follow for a developed economy once these benefits are no more.

As an aside, Trump was actually the perfect person to take America through this transition. Right-wing populist policies had to be given a chance, and shown to fail before consent can be manufactured for the pragmatic progressive policies needed now.

So, I guess what I'm saying is, expect a significant downturn in the economy and the stock market AFTER the Senate finds Trump not guilty in regards to the impeachment hearings. Because this downturn is unavoidable as China and the U.S. go their separate ways, and you may as well make the most of a crisis.

Sukh’s Thoughts: Exploding CBO deficit projections are purposely false in order to keep spending in check as long as American hegemony is still in play.

So, I am going to guess, that magically, we will experience the modest cut Mr. Taylor says is necessary to right the ship. The reality is, it's already baked into the cake (for an explanation, see my earlier comments below).

"As John Cogan explains in his recent book The High Cost of Good Intentions, consolidation paths like this require reforms that boost the efficiency of government programs – such as keeping the growth of Social Security spending per person in line with inflation."

Sukh’s Thoughts: The above will happen, because of lower healthcare costs and the additional spending that results from baby boomers drawing down their retirement savings and receiving payouts from their pension plans.

"The large deficit will crowd out important federal programs, including needed infrastructure investment, as well as private investment needed for economic growth."

Sukh's Thoughts: I have a feeling that we are going to learn that the above is not true. Yes, economic growth will be much slower than it has been in the past (largely because the population is aging, and no longer growing at the same rate as it has in the past. And, we've reached a point in time when the newest advances in technology (mostly to do with social media and online consumption) are actually time wasters and not efficiency enhancers.

BUT, with a better sharing of the productivity gains made since WWII, we are going to be amazed that, even though the growth numbers may not look good, somehow, we are all enjoying life a lot more than ever before.

We may not be buying as much stuff, but, for people who can find happiness in their ability to enjoy the leisure that time and a decent income affords them, life is going to be good. Yes, people may not be going on as many vacations to far away places, but they will find an incredible peace, just closer to home.

Sukh’s Thoughts: How will the retiring of the baby boomers affect future GDP growth and productivity? As they draw down their savings, will that allow government to spend less, as a percentage of GDP?

Even though government spending increases in regards to social security and medicare, this in turn also adds to GDP.

With, the draw down of private retirement savings along with the payout of pensions, adding to GDP, is what Taylor recommends not already baked into the cake?

It this how fiscal prudence is going to be sold as having saved the economy, and therefore, no need for cuts to retirement entitlements.

"The Congressional Budget Office’s (CBO) current baseline projection of federal government spending in future years far outpaces federal government revenue, as the figure below clearly shows. The result is an exploding federal budget deficit, which will bring the federal debt as a share of GDP to 144% by 2049, according to the CBO baseline, and likely to the 219% projected in the CBO’s alternative fiscal scenario. These debt levels are unprecedented in US history."

Sukh’s Thoughts: The above is in line with where Japan is today, so, how is this a problem? Japan has “survived” its aging population and is now seeing a population as old people die faster than younger ones are born. Will that not automatically bring down the average age of the population, even though it is at a higher level?

I was reading your article on the perils for tomorrow's taxpayers in using today's dollars to fund present public expenditures. Obsolete thinking, John. You are only looking at one side of the issue and ignoring all others.

See, government has no money. What it spends comes from taxpayers or lenders, and the latter with the presumption that taxpayers shall settle incurred debts. Therefore, all public expenditures are deficit or debt financed if you will, unaccounted as they are. There is a taxed portion to the deficit and a borrowed portion to the deficit, but its all deficit.

The pain for wasteful government expenditures doesn't hit those in the future regardless of whether the funds are taxed or borrowed. It's deleterious effects are visited on the populace in the here and now. Why? Because it's today's dollars that are funding government squander, corruption, over-regulation, and yes, even worthy public expenditures. Why? Because its today's inputs: labour, equipment, resources, or just money that are consumed or wasted in the endeavour.

When a dollar is wasted by government, that is one less dollar that may be put to worthy endeavour, which individuals and firms, which are owned by people, strive for. And it doesn't matter whether the funds come from the individual's saving's or chequing account, whether directed to pay taxes or buy bonds.

As regards the shifting of the burden to the future, a little Ricardian Equivalence!

A resident lender holds a government bond issued in the past with principle of $100 and accrued interest of $200. He seeks $300. The government takes by Taxation $300 from local taxpayers. It then redeems the bond and pays out the local lender, now enriched by the $300. In the transaction there are winners, the lender, and losers, the taxpayers, but in the aggregate - no change.

If the government had in the beginning refrained from borrowing and taxed the principle of $100, the taxpayers then would have been out the $100 and any future returns from their funds if invested. In effect, deprived of investing in a government bond, they would have been deprived of $200 in interest as well as the returned principle of $100, in total $300, which could be used to pay off the incurred debt had government borrowed the $100 way back when.

My point is that it doesn't matter whether government taxes or borrows because it all comes out to the same thing: the people of today are deprived of the returns from a worthy use of their money, in effect labour, resources, equipment. The problem is that the US Federal Government taking and spending $4 trillion, and more at the State and municipal levels, for doubtless dubious purpose. It is not a a $1 trillion problem, nor do we have a $23 trillion problem. We have probably an $80 trillion problem. What are we getting for our money????

One last point: what was the benefit of government repaying the debt of $300 by Taxation? How did this repayment affect the aggregate of assets, property, incomes of resident citizens? Were they enhanced, curtailed, or unaffected?

Put them all in a box. In repayment of the debt by Taxation, $300 moves from one part of the pile, taxpayers, to another part, lenders. So no change to the box. The public claim or bond held against said box of $300 is erased along with the $300 bond or asset held by resident lenders in the box. So no change to the box. So no benefit to repaying the debt, but there are huge costs in Taxation, in deterrence and government squander, that disappear with Borrowing. Thus, a government should always borrow and never reduce the public debt. Repay the lenders - always. But never reduce the public liability.

can a change in the way of tax are calculated, for one that charge a feed or rate, based of income & wealth be the solution, or one of then? You will contribute for what your make and for what you own.Another important point is the optimization of public speending...constant regulation is what is need it..... desregulation doesn't work because for human is very dificult to control greed.

Governments always face the temptation to spend more than they collect. But "balanced book" legislation is not the answer, because sometimes they need to do that to counter a recession.

I think the ideal solution would be to take the decision out of the hands of elected politicians, in the same way that decisions on interest rates have been taken away. Give a technocratic body, appointed by the government but with a different term, control over some key tax rate. Just as an appointed central bank controls the interest rate, this body would control its tax rate. Its mandate would be to maintain or slowly reduce the debt level over the long term, but to maintain full employment over the short term. It could, for instance, be given control of a value-added tax rate, or of a factor to be applied to all income taxes. The government would still control how progressive the tax system was.

Did Capitalism Kill Inflation? Is it true that “from the end of World War II until the late 1970s, a retain-and-reinvest approach to resource allocation prevailed at major U.S. corporations.” But since then business has followed “a downsize-and-distribute regime of reducing costs and then distributing the freed-up cash to financial interests, particularly shareholders”?

CIRCA 1984 building from the Administration's projected budget deficit of $180 billion for the fiscal year 1985, those rates of increase in spending and revenues imply a deficit of $325 billion in 1989, $757 billion in 1995 and a shade under $1,500 billion in 2000.

Because the debt is held by those that have purchased Treasury notes and other securities the concern is that the country will not be able to pay. When that happens, debt holders demand higher interest to compensate for the higher risk increasing the cost of all interest rates causing a recession.

At the same time at a press conference on March 20, Fed Chairman Jerome Powell said low inflation is “one of the major challenges of our time.” And our Real GDP numbers are positive. Real gross domestic product (GDP) increased 2.1 percent in the third quarter of 2019.

Is it true that low inflation is in large part a consequence of globalization or automation or deunionization—or a combination of all three—which undermine workers’ power to bargain for higher wages?

Is MMT in our future?

This all is interesting, but if some politician or economist can make housing, healthcare, and education better, faster, and cheaper let's go.

John, you wrote "Debt service will account for a rising share of spending, and the high debt will likely increase interest rates..."Yet the US Gov can set rates at zero, forever. There is no evidence propping up rates (via paying interest on bonds and/or IOR) has any beneficial effects. There is no reason for the government to intervene, propping up rates. Leave them at zero.1000 Castaways: Fundamentals of Economicshttps://www.amazon.com/dp/0648390616

Ah, the perennial campaign to cut Social Security and Medicare has started again, with all the trappings of Very Serious People. Mr. Taylor pretends that the Trump tax cut - mostly for the 1% - is not an important cause of the projected deficits. He skips over the failure of his past claims that the deficit was about to cause an inflationary spiral. Why not? His target readers will never check.

So True, this economist ignores economic growth with higher taxes that created budget surpluses during the 90's . Further, he ignores the fact that the US could gut its defense budget to by 1/2 and restrict military options to domestic defense only. We are getting pretty tired of Neo Liberal economic policies that do nothing more than exploit the poor and widen the wealth gap. Developing a domestic service economy would strengthen economic growth and expand employment to meeting domestic needs. Reducing the debt is a simple expansion of taxes to excessive bonuses and a broader income base for lower income workers.

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